US-China trade war threatens £6 trillion global meltdown: WTO chief in stark warning as Fed braces for higher inflation and weaker growth

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Global Economy Braces for Potential £6 Trillion Hit from US-China Trade Disputes

The intensifying trade war between the United States and China threatens to erase trillions from the global economy and spark a significant recession, a leading international organization has cautioned.

In a stern warning issued recently, the World Trade Organization (WTO) stated that a complete rupture in trade relations between the two economic superpowers could shrink the global economy by as much as 7 percent compared to projected growth.

This economic downturn would represent a staggering loss of approximately £6 trillion in overall output, exceeding twice the annual economic production of the United Kingdom.

Interest Rate Cut Predictions Amid Economic Headwinds

The WTO’s warning coincides with investor expectations that the Bank of England might leverage the latest decrease in inflation to implement interest rate reductions. This strategy aims to bolster the British economy amidst the escalating tariff disputes.

Despite a temporary dip in inflation to 2.6 percent in March, influenced by forthcoming increases in utility costs and taxes, analysts anticipate a likely interest rate cut from 4.5 percent to 4.25 percent in the upcoming month.

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Furthermore, market predictions suggest up to three additional rate cuts this year, potentially lowering rates to 3.5 percent by the end of the year. However, some experts foresee a more conservative figure of 3.75 percent for the year-end.

US Federal Reserve Acknowledges Economic Uncertainties

Federal Reserve Chairman Jerome Powell recently addressed the growing economic uncertainty, acknowledging ‘heightened uncertainty and downside risks’ for the US economy. Despite these concerns, he affirmed the US economy’s underlying strength, describing it as ‘in a solid position’.

Powell noted a deceleration in economic growth during the first quarter, moving away from ‘last year’s solid pace,’ attributing this slowdown to reduced consumer and business confidence, largely stemming from ‘trade policy concerns’.

Despite the dual challenges of ‘higher inflation and slower growth’, Powell indicated the Federal Reserve’s inclination to maintain stable interest rates. This approach signals a desire to ‘wait for greater clarity before considering any adjustments’ to monetary policy.

Tariff Policies and Trade Tensions

The fluctuating nature of tariff policies has resulted in the suspension of several significant levies. However, a baseline tariff of 10 percent remains applicable to a majority of goods entering the United States.

The US administration has also implemented additional tariffs on key sectors like steel and automobiles and is contemplating extending these to pharmaceuticals. The trade friction between Washington and Beijing persists, highlighted by substantial US tariffs reaching 145 percent on selected Chinese goods, albeit with exclusions for items like smartphones.

China has retaliated with tariffs of 125 percent on goods imported from the United States, escalating the ongoing trade dispute.

WTO Forecasts Trade Slowdown and Decoupling Risks

The WTO, under the leadership of Director-General Ngozi Okonjo-Iweala, has revised its global trade outlook, now anticipating a 0.2 percent contraction this year. This represents a significant downgrade from their October projection of a 3 percent expansion.

The organization further cautioned that a full reinstatement of broader tariffs could precipitate a 1.5 percent decrease in global goods trade, marking the steepest decline since the peak impact of the 2020 pandemic.

Concerns over Economic Decoupling

Okonjo-Iweala voiced her primary concern regarding the potential ‘decoupling’ of the Chinese and US economies, the world’s largest.

She elaborated, stating that ‘A decoupling could have far- reaching consequences if it were to contribute to a broader fragmentation of the global economy along geopolitical lines into two isolated blocks.’

According to WTO projections, such a scenario of economic fragmentation could lead to a long-term global GDP reduction of 7 percent, a figure she characterized as ‘significant and substantial’.